1980 (8) TMI 54 - HC - Income Tax

High Court rules genuine transactions not tax avoidance under Indian Income-tax Act

Commissioner Of Income-Tax (Central), Calcutta Versus Jai Narain Ram Chander

Commissioner Of Income-Tax (Central), Calcutta Versus Jai Narain Ram Chander - [1981] 128 ITR 179, 20 CTR 258 Issues Involved:1. Applicability of Section 44F of the Indian Income-tax Act, 1922.2. Determination of whether the amount of Rs. 94,775 was taxable for the assessment year 1957-58.3. Deliberate avoidance of tax liability.Issue-wise Detailed Analysis:1. Applicability of Section 44F of the Indian Income-tax Act, 1922:The primary issue was whether Section 44F applied to the transactions conducted by the assessee. The Income Tax Officer (ITO) argued that the assessee had sold shares just before the declaration of dividends at face value, which was below market value, to trusts benefiting minor children, wives, and mothers of the partners, as well as a charitable trust controlled by the family. The ITO believed that the assessee, being the managing agent of the company, had prior knowledge of the dividends and thus aimed to avoid tax through these transactions. Consequently, the ITO taxed Rs. 94,775 as deemed income under Section 44F.2. Determination of whether the amount of Rs. 94,775 was taxable for the assessment year 1957-58:The Appellate Assistant Commissioner (AAC) and the Tribunal both examined whether the transactions resulted in taxable income. The AAC concluded that for tax avoidance to exist, there must be a receipt of income liable to tax and an artifice or device to avoid such tax. The AAC found that the first ingredient was absent, as the shares were sold at face value and the assessee did not receive the real worth of the shares or any dividend income, which went to the transferees. The AAC held that the transactions were planned to reduce tax liability but did not constitute tax avoidance. The Tribunal upheld this view, noting that the assessee had divested itself of the shares before the declaration of dividends, thus reducing tax liability but not engaging in tax avoidance.3. Deliberate avoidance of tax liability:The judgment emphasized that Section 44F targets deliberate tax avoidance through transactions designed to avoid tax liability. The Gujarat High Court's decision in CIT v. Sakarlal Balabhai [1968] 69 ITR 186, affirmed by the Supreme Court, clarified that Section 44F applies only to deliberate and intentional avoidance of tax liability. The Tribunal found that the assessee's transactions were bona fide and not aimed at tax avoidance. The Tribunal noted that the transfers were made before the dividends were declared, and the assessee had divested itself of the income source. Therefore, the transactions did not constitute tax avoidance under Section 44F.Conclusion:The High Court agreed with the Tribunal's findings, affirming that the transactions did not attract Section 44F as they were bona fide and not intended to avoid tax liability. The High Court emphasized that the avoidance of tax liability must be a deliberate act, and if transactions are part of ordinary business dealings without the intention to avoid tax, Section 44F would not apply. The question was answered in the affirmative, favoring the assessee, with no order as to costs.